Activist Investors To Keep Boards Honest?

Directors could be kept on their toes if agitating shareholders and debtholders become a recurring fixture in Australia in 2012.

BILLY FARRELL/PatrickMcMullan.com

Activist shareholder Carl Icahn

They’ll follow the footsteps of Spotless Group shareholders, who are currently pressing its board to entertain a A$711.4 million offer from private equity outfit Pacific Equity Partners.

Nomura’s Australian head of mergers & acquisitions Grant Chamberlainrecalls the last time the domestic market was exposed to vocal institutional shareholders was in 2006 and 2007 on the belief boards were recommending offers below fair value, such as in the case of Qantas, APN News & Media and FlightCentre.

“I believe companies that have previously received approaches could again attract trade buyers or private equity interest as their attraction as targets still remains; they’re just trading at lower levels,” Mr. Chamberlain told Deal Journal Australia.

He said any boards with a bid on the table could be on the receiving end of shareholder opposition if they were quick to reject bids.

Mr. Chamberlain added that it was not yet clear whether investors would need to follow through threats to requisition general meetings to replace directors as threats alone could be enough.

Greenhill Caliburn’s head of debt refinancing and restructuring Sylvia Wiggins told Deal Journal Australia it was a complex balancing act for directors who owe their duty to the company as a whole – including its shareholders, lenders, clients, suppliers and regulators– not the individual agitator.

“Their role is to preserve and create value but they also need to make sure their value proposition is understood by stakeholders so they have a leg to stand on if an agitator comes along and their value message is something they should be consistently communicating to the market,” Ms. Wiggins said, acknowledging that having a running start to defending value would be easier than from a standing start.

“Management need to recognize we’re managing the money of pensioners…every dollar taken out is a dollar less to their retirement,” he told Deal Journal Australia. Mr. Marais added that if compensation didn’t match performance, questions from investors would be raised.

Companies like Nine Entertainment Co. which have refinancing due in the near term could find themselves the target of agitating debtholders as traditional lenders withdraw from the market and sell positions in the secondary market.

“As we have seen in some recent Australian restructurings, U.S. hedge funds are bringing U.S. bankruptcy concepts to our shores, with strategies like credit bids and they are showing the amount of pressure they’re prepared to put boards under to make something happen,” Ms. Wiggins said.

Moelis & Co. managing director Chris Wyke believes an elevated amount of secondary debt could trade this year due to the combination of a tough operating environment and the challenges of companies to refinance due to hardened debt markets.

“The risk is a liquidity crunch turns into something more credit-based and companies with debt maturing will either need to push out debt expiry or diversify their sources of funding to avoid tripping on covenants,” he told Deal Journal Australia.

Mr. Wyke said that when debt starts trading, it often results in a restructuring situation becoming active and large amounts of debt can change hands in a short time, resulting in options such as debt to equity conversions.

He suggested that Australia’s general retail sector – both in private equity hands and listed companies – could be subject to such situations in 2012.

Moelis advised hedge funds involved in change of control transactions in Alinta Energy and Centro Properties Group, and is currently advising similar parties with senior debt in Nine Entertainment.

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Deal Journal Australia is an up-to-the-minute take on the deals and deal makers that shape the Australian landscape, including mergers and acquisitions, capital raisings, private equity and debt markets. In short, wherever money changes hands. Deal Journal Australia is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s Gillian Tan is the lead writer, with contributions from other Journal and Dow Jones reporters and editors. Send news items, comments and questions to gillian.tan@wsj.com.

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